 In this presentation we will discuss capital expenditures and revenue expenditures and the difference between the two using a forklift as an example when we go through the demonstrations. So we have the capital expenditures and the revenue expenditures and often the question is should something be capitalized as a capital expenditure or should it be expensed as a revenue expenditure. In other words what statement should the expenditure go under? If it is a capital expenditure it's going to go on the balance sheet. If it's a revenue expenditure it's going to go on the income statement. If we think about something like our forklift here the question is if we do some maintenance to the forklift is it a capital expenditure is something we should put on the balance sheet and then expense over time or is it something that we should expense in year one. Should we put it on the balance sheet as we do with the forklift itself and expense the cost over some useful life or should we put it on the income statement and just expense it as it happens. Now of course the difference between those would be if we capitalize the expenditure something like putting a whole new engine in the forklift for example it would then go on the balance sheet whereas if we did some maintenance on the forklift then we would put it on the income statement and there's always going to be some questions in terms of how much repairs and maintenance should be putting on the on the balance sheet and how much should be just expensed at the time of purchase. So expense recognition then would be deferred if we're talking about a capital expenditure meaning we're not going to write off the expense at the point in time we have the expenditure if we put a whole new engine into the forklift then we're going to put it on the books as an asset as we did with the forklift itself and then expense it over its useful life depreciated over its useful life and that means we're going to defer the expense and we're not going to lower net income in year one it will be lowering net income in later years whereas if it's just a normal repair then we can just write it off in this year we can put it on the books as an expense on the income statement recognize it and decrease net income note the different objectives we might have depending on whether we're looking at it in terms of wanting to look good for our financial statements or in terms of taxes so in terms of wanting to look good we would probably want to put it on the books as a capital expenditure and and note that wanting to look good or not look good is not the the reason for us putting it on one or the other we're trying to make our financial statements as fair as possible but sometimes it helps to look at some type of objectives that may be there in terms of do we want how would we look better how would we look worse when would someone want to look better or worse if we're talking about looking better to present our financial statements possibly for a loan or investment we'd probably want it on the capital asset because then we'd have more assets and we wouldn't be decreasing net income at the point in time of purchase if we wanted to look worse probably for taxes then we would want to recognize it as a revenue expenditure and expense it now have basically a deduction lowering net income lowering therefore the taxes when considering net income then under the capital expenditure it's going to be higher and at least the year of the expense so at the year of the expenditure that we have the payment that we make the net income would be higher because we wouldn't be expensing it at the point in time we make the payment we would be putting it on the books as an asset as we did for example with the forklift itself whereas if we were talking about a revenue expenditure net income would then be lower and again you can kind of see how that would relate to taxes if we were talking about taxes we would rather have a lower net income if we're talking about just looking good we would rather have a higher net income so we'd rather look good if we're trying to get investments or financing the company we would rather look worse if we're trying to lower our taxes that we end up paying from a tax standpoint the capital expenditure would result in higher taxes because we have the higher net income now of course this results in year one having higher taxes because we're not having anything on the income statement except for depreciation if it was depreciated during that time period we're not expensing the entire cost of it notes that it is a timing difference however and then in later years we're going to have the capital expenditure have lower revenue because we're going to be depreciating that that expenditure but no so it's going to work itself out over the time period over the life of the asset however for tax purposes we would typically want to lower taxes early just because of the time value of money so in the year of the expenditure the year we make the payment we're going to have higher taxes and if we had a preference we would rather have lower taxes now and typically higher taxes later if that's what had to happen rather than having higher taxes now and lower taxes later that's just the time value of money unless there's some other factor involved including tax rates going up or something like that in the future and then we have of course the revenue expenditure resulting in lower taxes at the point in the timeframe of the expenditure being made so and that is because we are expensing it at the point it's made so this can run into a lot of like tricky areas in terms of well what should we do in this particular case is it something that's going to be a capital expenditure or is it something we can just write off an expense during this current time period so to look at that we consider generally ordinary repairs which would be the revenue expenditures and the betterments and extraordinary repairs and those would be the things like the capital expenditures so things that you think of as normal repairs would typically just be expensed so if you think of the forklift you're thinking about things like maintenance on the forklifts if it doesn't increase the productivity of the forklift does not extend the useful life like an oil change or just normal maintenance on the forklift those types of things that we're doing to the forklift is just to maintain it it's not to change what it's doing it's not trying to say that it's now a forklift that can do more stuff than it did before it's not a forklift that's extending the useful life it's still normal maintenance to to achieve the normal useful life that we had already calculated it to be as long as that's the case then we will typically just expense it and and that'll be it on the other hand if it's a betterment and extraordinary repairs then we're going to capitalize it so that's going to be things like large overhauls so if we put a whole new engine into the forklift then you would think that that would extend the useful life and therefore be something that we should capitalize and not just be a normal expense of the forklift if it does extend the useful life beyond the original estimate then that would typically be a sign that we need to capitalize it because the original estimate when we bought the forklift said it had a useful life of so many time periods so many years based on normal maintenance if we do maintenance that is extraordinary that's going to extend that useful life then it is something that we should typically capitalize so if we have this forklift then we're talking about revenue expenditures would typically be something like the oil change maintenance normal type of things just to get the forklift to its normal maintenance process not things that are typically used in order to extend the life or have extraordinary betterment betterments or to make the forklift be able to achieve something it was not originally purchased to do and then if it's a capital expenditure then maybe it's a complete overhaul maybe we change the whole engine in it maybe we overhaul the forklift to have some job other than just being a forklift we make it into some other type of vehicle that can help us out with other type of operations if that's the case if it extends the useful life or changes the functionality of the forklift in some way some substantial way then we would basically want to capitalize the expenditure as we did with the forklift itself and then depreciate it over the useful life